Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25383
Authors: 
Neus, Werner
Walz, Uwe
Year of Publication: 
2002
Series/Report no.: 
CFS Working Paper 2002/07
Abstract: 
We analyze the desinvestment decision of venture capitalists in the course of an IPO of their portfolio firms. The capital market learns of the project quality only in the period following the IPO. Venture capitalists with high-quality firms face a trade-off between immediately selling their stake in the venture at a price below the true value and having to wait until the true value is revealed. We show that the dilemma may be resolved via a reputation-acquiring mechanism in a repeated game set-up. Thereby, we can explain, e.g., the advent of 'hot-issue market behavior' involving early disinvestments and a high degree of price uncertainty. Furthermore, we provide a new rationale for underpricing. Young venture capitalists may use underpricing as a device for credibly committing themselves to acquiring reputation.
Subjects: 
Exit Decisions
Venture Capital
IPO
Underpricing
JEL: 
G24
G14
D82
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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